Regardless, I don’t like their policy proposal (as you can see from TV debates here and here).

That being said, I also realize that stereotypes can be very unfair, so it’s important to judge each argument on the merits and not to reject an idea simply because it comes from a rich guy.

That’s why I was very interested to see that Bill Gates, the multi-billionaire software maker, decided to add his two cents to the discussion of tax reform.

Here’s what Gates said at an American Enterprise Institute forum (transcript here and video here).

…economists would have said that a progressive consumption tax is a better construct, you know, at any point in history. What I’m saying is that it’s even more important as we go forward.

He doesn’t really expand on those remarks other than to say that it’s important to reduce the tax on labor.

That part of Gates’ remarks doesn’t make much sense for the simple reason that workers are equally harmed whether the government takes 20 percent of their income when it’s earned or 20 percent of their income when it’s spent.

But his embrace of a “progressive consumption tax” is very intriguing.

So Bill Gates is halfway on the path to tax policy salvation. His endorsement of so-called progressivity is wrong, but his support for getting rid of double taxation is right.

If you like getting into the weeds of tax policy, it’s interesting to note that Gates is advocating the opposite of the plan that was proposed by Congressman Dave Camp.

Camp wants to go in the right direction regarding rates, but he wants to exacerbate the tax code’s bias against capital. Here’s what I said to Politico.

Dan Mitchell, an economist at the libertarian Cato Institute, said he didn’t see it as an individual versus business issue, but rather took issue with Camp’s punitive treatment of savings and investment. “The way Camp is extracting more money from businesses — more punitive depreciation and the like — is he is making the tax system more biased against savings and investment,” said Mitchell, who worked for Republican Sen. Bob Packwood after the historic 1986 tax act that Packwood helped negotiate as chair of the Finance Committee.

By the way, this doesn’t mean Camp’s plan is bad. You have to do a cost-benefit analysis of the good and bad features.

Just like that type of analysis was appropriate in 1986, when the bad provisions that increased taxes on saving and investment were offset by a big reduction in marginal tax rates.

The 1986 law did take aim at some popular business benefits, including a lucrative investment tax credit. But the reward was a lot sweeter. “At least then, we got a big, big reduction in tax rates in exchange,” Mitchell said.

Here’s an interview I did with Blaze TV on Congressman Camp’s plan. If you pay attention near the beginning (at about the 2:00 mark), you’ll see my matrix on how to grade tax reform plans.

Now let’s circle back to the type of tax system endorsed by Bill Gates.

We obviously don’t know what he favors beyond a “progressive consumption tax,” but that bit of information allows us to say that he wants something at least somewhat similar to the old “USA Tax” that was supported by folks such as former Senators Sam Nunn and Pete Domenici.

Is that better than the current tax system?

Probably yes, though we can’t say for sure because it’s possible they may want to increase tax rates by such a significant amount that the plan becomes a net minus for the economy.

10 Responses

Theoretically, a flat tax on income and a flat tax on sales both are taxes on consumption, and if applied at the same rate should be equal in tax revenues.

However, in practice they are not the same. Taxes on income are paid out of gross income and gross profits. If you switch to a flat tax on sales the tax will be collected on top of gross income. The only way to make them equal would be to drop future gross incomes to equal current net incomes, but that is not the way the “FairTax” is being promoted. [See the note on page 143 of “FairTax the Truth”, dismissing this “cost push” problem, since net salaries also go up.]

There are other differences. To be equal, the Flat Tax on income must be based on domestic components only, since there is no embedded tax on imported components. Also, executive perks like dinners and tickets must not be deductible from gross profits, to remain equal.

A detailed examination of each type of flat tax reveals positives and negatives for both. However, it would be relatively easy to create a hybrid flat tax that takes advantages from both.

I like the flat tax BUT I think it is essential that consumers actually see the tax added to the list price. Only then will they begin to understand the true cost of government and how they are directly and unabashedly affected. Only then will they understand how important it is to reduce the size and scope of government and only then will they start voting for fiscal conservatives.

The only downside to a consumption tax is the probable rise in smuggling, black markets etc. Small price to pay and much cheaper to control than the current system.

I really enjoy your newsletters and read them every day. They’re not only very educational, but well-written and entertaining!

My question is this: Given the topic at hand, I’m curious why you don’t take an opportunity such as this to point out the absurdity of the entire Federal Reserve system, and discuss the true nature of the implementation of the personal income tax, which is to pay interest to the Federal Reserve on money they print out of thin air, and the U.S. government borrows at interest; We shouldn’t be borrowing money from anyone, since the Constitution specifically vests the U.S. government itself, with this responsibility.

The Grace Commission, in a report submitted to President Ronald Reagan on January 15, 1984, found that, “100% of what is collected is absorbed solely by interest on the Federal Debt [interest owed to the Federal Reserve]… all individual income tax revenues are gone before one nickel is spent on the services taxpayers expect from government.”

You lost me at the start. Taxes are levied on “net” income, that is all income after subtracting expenses related to earning that income, and after subtracting allowed charitable expenses.

To Mr. Mitchell,

A flat tax on income is fine. But, a tax on consumption catches all previously taxed savings when they are spent. How do you eliminate this after-the-fact grab at already-taxed savings, especially of the older population?

Andrew: I was talking about a flat tax on income, where there are no deductions, verses a flat tax on sales. Since the flat tax on sales is based on gross salaries, purchases, and gross profits, the final cost of the product will be higher. “FairTax the Truth” estimates the increase in cost of all products to be 24.7%. [In practice this could not happen without an increase in the monetary base, since people would be forced to reduce the quantity of purchases because of higher prices.]

Ed: One of the benefits of either flat tax is the single rate. Whether it is taken out of income or point of sale, everyone will know how exactly much it is and there will be widespread support for lowering the rate.

A flat tax on income does not have to be intrusive, nor is it more complicated than a flat tax on sales. Assuming no progressivity, employers would withhold the exact amount necessary, thereby avoiding the need for individuals to file at all. Since employers could only deduct gross salaries in line with the amount withheld, there would be no necessity to provide information by individual.

If you add a standard deduction, all that goes out the window, since the effective tax rate would be different for each individual.

Better would be a cash payment, like the “prebate”. The prebate amount could be deducted from means-tested support and Social Security for no net change. Since cash distribution can be severed from tax collection, you would retain the full savings mentioned above.

The life of a rich person is not as pleasant as most think. You even have to pretend you’re a leftie.

Now, jokes aside, wealth is often a combination of competence, motivation and luck ( and in crony capitalism also political ability to bamboozle voters — but this vicious cycle to decline is another story). Extreme wealth often involves all three elements combining. Many very wealthy people feel some guilt about the luck component. But reacting to the guilt by systemically flattening the effort-reward curves is the wrong central plan, as it leads to systemic loss if competitiveness — and decline.

You lost me again. A flat tax on sales is just that, not involving the salaries and other costs of the business. A tax on sales is entirely passed along to the consumer, so it is a tax on the consumption of the buyer, not on any part of the business.

Also, there is no tax on intermediate goods, the goods which businesses buy to use in making their product or service.

I really enjoy your newsletters and read them every day. They’re not only very educational, but well-written and entertaining!

My question is this: Given the topic at hand, I’m curious why you don’t take an opportunity such as this to point out the absurdity of the entire Federal Reserve system, and discuss the true nature of the implementation of the personal income tax, which is to pay interest to the Federal Reserve on money they print out of thin air, and the U.S. government borrows at interest; We shouldn’t be borrowing money from anyone, since the Constitution specifically vests the U.S. government itself, with this responsibility.

The Grace Commission, in a report submitted to President Ronald Reagan on January 15, 1984, found that, “100% of what is collected is absorbed solely by interest on the Federal Debt [interest owed to the Federal Reserve]… all individual income tax revenues are gone before one nickel is spent on the services taxpayers expect from government.”